Has Inheritance Tax Been Abolished for Estates Under £1million?
The short answer to whether the government has fulfilled its promise to reduce Inheritance Tax on joint estates worth up to £1 million is - not exactly.
As it stands currently, each person can leave £325,000 worth of assets on their death before paying Inheritance Tax, anything above this threshold is taxed at 40%. As there is no Inheritance Tax between spouses, the second of the married couple to die can inherit the unused allowance of their spouse, meaning that the survivor can have a threshold of up to £650,000. These thresholds have been frozen for the foreseeable future, but for deaths from April 2017, the government is introducing a new ‘Residential Nil Rate Band’.
What is the Residential Nil Rate Band?
This is an additional tax free allowance available to estates where a property is being passed to descendants. The allowance will begin at £100,000 per person to increase to £175,000 per person by 2020.
What are the Requirements for the Residential Nil Rate Band to Apply?
For the allowance to be claimed, the deceased must leave their principal private residence to their spouse or direct descendants. ‘Descendants’ can include step-children, foster children and spouses of children. The second of a married couple to die can then claim their spouse’s unused allowance, but this applies to married couples only and not to cohabitees.
The Residential Nil Rate Band will only be available on estates up to £2million and so individuals or couples with estates of this size should consult their solicitor to look at making lifetime gits or direct gifts to children in their Will.
The Residential Nil Rate Band will be allowed against the net equity in the property and so it may be worth reviewing any borrowing in the estate.
What if I Sell My Property Before My Death?
The government will include downsizing provisions so that the allowance is still available for example, where somebody has sold their property to go into a care home, so long as the sale was after 8 July 2015.
What Should I do to Make the Most of This Threshold?
It would be worth reviewing your Will to make sure that you are making the most of the Nil Rate Band.